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Virtually all property insurance coverage forms exclude various categories of loss associated with water. The water exclusion clause in the ISO commercial property and homeowners policies excludes loss caused by flood, surface water, water that backs up from a sewer or drain, and water under the ground surface. Though this exclusionary language is quite broad, disputes continue to arise when the language is applied to particular loss situations. The controversies created by differing views have led to several court decisions that are discussed here. Although some of the cases cited are old, they all remain valid.

Concurrent causation

The introductory paragraph to the water damage exclusion says that the policy will not pay for a loss caused directly or indirectly by the excluded peril, regardless of any other cause or event that contributes concurrently or in any sequence to the loss. These words were introduced in 1986 to address the problem of concurrent causation. Briefly, the theory of concurrent causation was used by claimants to argue that if, under an open perils policy, there were two causes of a loss, one excluded and one not, the loss would be covered. For example, if faulty construction of a dam caused it to burst, flooding land downstream, property damage caused by the flood should be covered in spite of the flood exclusion because the faulty construction of dams was not excluded.

Because the catastrophic nature of a flood, hurricane, or tidal wave means that not one or two, but possibly hundreds or thousands of units in a general area are damaged, and given the fact that only persons in flood-prone areas will purchase coverage against the exposure, such risks are uninsurable through normal channels. Proponents of the concurrent causation theory argued that it is precisely the catastrophic exposure--that represented by natural and inevitable events rather than accidental or artificial causes--at which the water exclusion, theoretically, is aimed, and not a loss caused by faulty construction of a dam.

This wording must therefore be kept in mind when reading about the cases cited in this discussion since most of them occurred while the theory of concurrent causation was still operative.

A case that might have been decided differently had the concurrent causation theory not applied is Safeco Ins. Co. v. Guyton, 692 F.2d 551 (9th Cir. 1982). Following heavy rains in September, 1976, a system of flood control channels, levees, and dikes in the Palm Desert area of California failed to contain the accumulation of water. A number of homeowners insureds sought recovery under their all risk policies for the ensuing flood damage, partly on the grounds that their loss was proximately caused by the water district's negligence in maintaining the flood control system. The insurers invoked the standard homeowners water exclusion, e.g., flood or surface water, and argued that the flood itself had preceded in the chain of causation any negligence that might have been a contributing or intervening cause of the damage.

A California district court agreed with the insurers but was overruled when the case was appealed to the Ninth Circuit Court of Appeals. That court held that "two independently created conditions [the flood and the negligently maintained dike] interacted to cause [the] loss" and that an all risk homeowners policy, since it provides coverage for damage caused by third party negligence, would respond to the insureds' loss.

The Supreme Court of Colorado reached a different decision in Kane v. Royal Ins. Co. of America, 768 P.2d 678 (Colo. 1989). The Lawn Lake Dam in Rocky Mountain National Park failed. The water swept downhill into the Fall River, which overflowed its banks and flooded many homes and businesses.

The insureds' argument for coverage took two forms. The first was that the term "flood" was ambiguous since the policy made no distinction between naturally and artificially caused floods. The second argument was that the flood was caused by negligence, which was not an excluded cause of loss. In a decision that seems to forecast the policy language in use today, the judge found the arguments did not hold water and that the term "flood" was not ambiguous. Referring to Webster's Collegiate Dictionary, Ninth Edition, the judge stated that a "flood" is the "rising and overflowing of a body of water especially onto normally dry land." The definition made no distinction between naturally and artificially occurring flooding.

The judge found, in ruling against the second argument, that the policy language precluded coverage because loss "caused by, resulting from, contributed to or aggravated by [a flood]" was excluded. Although the loss might have been caused by negligence, it was also caused by the natural conditions--the amount of rainfall--which preceded the flood.

The current policy language seeks to eliminate any possibility of coverage, through the wording "such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss," and through the addition of exclusions for weather conditions and acts or decisions, including those of governmental bodies.

Flood Insurance

Flood insurance, of course, is available for both residential and commercial risks through the National Flood Insurance Program. In the flood insurance policy, "flood" means either the overflow of inland or tidal waters or the unusual and rapid accumulation or runoff of surface waters from any source. A flood occurs when these waters invade land areas that are normally dry and inflict a condition--that is both general and temporary--of partial or complete inundation. Also included as flood are mud slides caused by flooding. Thus, flood insurance aims to cover the traditionally uninsurable natural forces (whether or not set in motion by man) that result in widespread damage verging on or equaling the catastrophic.

Although such events as water flowing from a ruptured city water line have been termed a "flood," generally courts have held that a flood means a large-scale inundation or deluge from a body of water. The court in Kane, discussed previously, for example, found that a water main was not a body of water, so water from a ruptured main did not constitute a flood.

However, in Wallis v. Country Mut. Ins. Co., 723 N.E.2d 376 (Ill. App. 2000), the court found that a man-made watercourse was a body of water, and the water exclusion precluded coverage for damage caused when it flooded. Larry and Mae Wallis owned a home with the Rob Roy creek flowing about 150 feet away. The creek was not natural but was a man-made irrigation channel used by nearby farms.

Severe storms struck the area and the creek rose out of its banks, eventually reaching the Wallis home and flooding the crawlspace underneath the house, the garage, and the living quarters, causing extensive damage. Their homeowners insurer, Country Mutual, denied their claim based on the water damage exclusion.

The homeowners argued that the damage was not caused by a flood, surface water, or back-up from a sewer or drain, which is what the water exclusion addressed. They also asserted that the terms were ambiguous because more than one interpretation could be made. The court, though, quoting Shakespeare, said that "plaintiff's argument is `much ado about nothing.'"

The insureds said that the damage did not result from a flood because the water overflowed from a man-made source, which, they claimed, was not how the term "flood" had been interpreted in the past. In contrast, the court said, "The common meaning of a flood is `a rising and overflowing of a body of water that covers land not usu[ally] under water." The creek was a body of water, the insureds' home was not usually under water--ergo, a flood occurred.

The court found no credence in the argument that a man-made body of water cannot cause a flood. The court stated, "The creek is a permanent watercourse. The creek has a defined bed, visible banks, and a recurrent flow of water." That the creek was man-made did not matter as long as it retained the other characteristics listed. Because flood was part of the water exclusion, the loss was not covered.

The Chicago flood of 1992 brought another dimension to the term's meaning. In that event the freight tunnels beneath the Chicago River were breached, allowing some 300 million gallons of water to flood the downtown office area. The ISO commercial forms exclude flood and water under the ground surface "flowing or seeping through foundations, walls, floors or paved surfaces; basements. . . or doors, windows or other openings," which would preclude coverage for property. Cases involving loss of business income, however, allege the losses were the product of a civil evacuation order, and not flood.

Surface Water and Sewer Back-Up

An often-cited precedent for construing the water exclusion clause's reference to surface water was established in Richman v. Home Ins. Co. of New York, 94 A.2d 164 (Pa. Super. 1953). The court stated that an examination of the various definitions of "surface water" shows that the term is commonly understood to mean water on the surface of the ground usually created by rain or snow which is of a casual or vagrant character, following no definite course and having no substantial or permanent existence.

This understanding of the meaning of "surface water" may be seen in Georgetowne Square v. United States Fidelity and Guaranty Co., 523 N.W.2d 380 (Neb. App. 1994). A retaining wall on the insured's property was damaged by water and water pressure from an underground pipe that drained water from the roof of a neighbor's building. The insurer denied the claim, based on a policy provision excluding coverage for damages resulting from flooding, which the policy defined to include "run-off" and "surface water."

The court found that surface water is water "which is diffused over the surface of the ground, derived from falling rains or melting snows, and continues to be such until it reaches some well defined channel in which it is accustomed to flow and does flow with other waters." The court further found that surface water and run-off both lost their characteristics as surface water when diverted into artificial channels.

With respect to damage from water that backs up through sewers or drains, distinctions have been made between cases involving a high water table and those confined to sewer blockage--where the sewer fails to accept the water from within the structure's plumbing system and that water spills over the structure. While it is apparent that the exclusion applies in the case of the high water table, it is not so clear that it applies to the second situation. In the case of sewer blockage where the sewer fails to accept the water from within the plumbing system, the water has never been in the sewer system.

Courts have also ruled that raw sewage is "water" for purposes of the water exclusion. For example, in Citrano v. Hingham Mut. Fire Ins. Co., 788 N.E.2d 975 (Mass. App. Ct. 2003), an insured incurred damage when water-borne sewage backed up through a basement toilet due to heavy rains. The homeowners insurer, Hingham, denied coverage based on the water damage exclusion.

The insureds argued that the damage was not caused by water but by sewage. The court, though, stated that the water referred to in the exclusion was "not pure tap water or rain water, but only water that backs up from sewers (or drains)." The court found that common usage of the word "sewage" "implies waste borne in water." The court said even if a difference existed between sewer water and the sewage carried in it, the exclusion would still apply because water, which backed up in the sewer line and transported the raw sewage into the basement, was a contributing cause of loss. Many forms later added sewage to the exclusion wording, apparently shore up the intent.

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About the Author

Christine G. Barlow, CPCU, is an Assiociate Editor of FC&S, a division of Summit Business Data. Christine has experience in claims, underwriting and training. Before joining FC&S, Christine worked as an Underwriting Supervisor for Maryland Auto Insurance Fund, and as Senior Underwriter/Underwrite... More